China acts to crank up credit as lending, economy slow

China’s central bank cut the amount of cash banks must hold in reserves on Saturday, boosting lending capacity by an estimated 350-400 billion yuan ($55.6-$63.5 billion) in a bid to crank up credit creation as the world’s second-biggest economy faces a fifth successive quarter of slowing growth.

The People’s Bank of China (PBOC) is on the course of gentle policy easing to cushion the world’s fastest-growing major economy against stiff global headwinds as Europe’s debt crisis grinds on, although it has been treading warily.

The cut, announced late evening, is set to boost the confidence of domestic stock investors, who have been eagerly awaiting clear signs of an easing of monetary policy.

“It’s a very positive move for the stock market, and it will create a bullish stock market,” Li Daxiao, the research head of Shenzhen-based Yingda Securities, said in an online note.

The PBOC cut big banks’ reserve requirement ratio (RRR) by 50 basis points to 20.5 percent, effective from next Friday, after repeatedly defying market expectations for such a move after it first cut the ratio last November.

Jin Qi, an assistant governor with PBOC, said in comments published on Sunday that China would continue to stick to a prudent monetary policy.

“Economic downward pressures coexist with price rise pressures,” she said.

But if bank lending stays weak and capital inflows remain volatile, the central bank would have no choice but to cut RRR further, analysts said. “It’s not a big surprise. Although they (Chinese leaders) stress policy stability, an RRR cut is necessary. Trade and monetary data in January pointed to some downward pressure on the economy,” said Hua Zhongwei, an economist at Huachuang Securities in Beijing.

“But policy easing will be gradual given the central bank sounded cautious about inflation in its fourth-quarter monetary policy report.”

China’s economy is likely to slow to an annual growth rate of 8.2 percent in the first quarter from 8.9 percent in the previous quarter, according to the latest Reuters poll.

Data for January came in below market expectations, with exports contracting 0.5 percent from a year earlier and money supply growth falling to 12.4 percent from the previous month’s 13.6 percent, which analysts said argued for more easing.

“The growth implications of the below-normal lending in January are dire, should that lending pace be continued,” said Paul Markowski, President of New York-based MES Advisers, a long-time investment adviser to China’s monetary authorities, who calculates lending was on a 7.9 percent growth path.

“The implication of that is sub-7 percent GDP growth for the year — a real recession,” he said.

Economists broadly believe China’s economy needs to grow at around 8 percent a year to absorb the annual influx of new entrants to the workforce and rural migrants leaving the land to find jobs in the country’s vast factory sector.

Slower growth also has ramifications for the world economy — already hampered by decaying demand from debt-ridden Europe and still under-spending U.S. consumers — given that China now adds more each year to net global growth than any other nation

Source: Reuters